Is an Oral Joint Venture Subject to the California Statute of Frauds?

Often real estate transactions will be formed by oral agreements of members, and they are often a joint venture, although the parties may consider it a “partnership”.

The legal nuances of a joint venture are important to consider if a written joint venture agreement is not prepared and signed. 

In the recent appellate decision in Clarke v. Jin-Quan Yu, the parties, a venture capitalist and two scientists who had worked together on past companies, discussed and took steps toward forming a new company—CHange Pharma, Inc.—to develop and commercialize carbon- hydrogen bond activation, known as C-H activation, technology.

When disagreements arose over the amount of initial funding needed, the scientists ultimately obtained funding from other sources.

Plaintiffs CHange and John Clarke, the venture capitalist, appeal the summary judgment entered in favor of Defendants Jin-Quan Yu and Benjamin Cravatt, the scientists.

The appellate court concluded summary judgment was proper on all claims asserted against Defendants.

The claims for breach of oral and implied joint venture agreement were barred as a matter of law by the statute of frauds.

Plaintiffs contended the statute of frauds does not apply to either oral or implied joint venture agreements.

Yet Plaintiffs offered no caselaw, and the appellate court was aware of none, that categorically exempts oral or implied joint ventures from the statute of frauds.

It published this opinion to clarify that an oral or implied joint venture agreement is subject to the statute of frauds if the agreement, by its terms, cannot be performed within a year from its making. (Civ. Code, § 1624, subd. (a)(1).)

The argument is often made that a joint venture to purchase real property, improve it, and then re-sell it for a profit can be performed within one year from its making, and is therefore, not subject to the statute of frauds.

Here, Clarke himself testified “the purpose of the joint venture” was “to develop and ultimately commercialize” Yu’s C-H activation technology. Defendants and a nonparty scientist involved in Change attested it was not possible to develop this technology in less than one year.

Clarke’s uncorroborated and self-serving declaration that CHange “could also have (and did) develop Yu’s technology in . . . less than a year”—unmoored from his proffered experience or any record evidence—does not create a genuine issue of fact sufficient to defeat summary judgment.

The breach of fiduciary duty claim hinged on a duty arising from an enforceable joint venture agreement, so it failed with the joint venture claims.

Summary judgment was also proper on the promissory estoppel claim.

The promises Plaintiffs identify are either unenforceable, not grounds for establishing promissory estoppel given the bargain involved, or not clear and unambiguous.

Finally, as for the quantum meruit claim, case law indicates plaintiffs must perform the at-issue services based on the expectation the defendants would compensate them.

Because Plaintiffs concede Clarke expected compensation in the form of his interest in CHange, rather than payment from Defendants, summary judgment in Defendants’ favor was appropriate.

Clarke is a venture capitalist who describes himself as a “sophisticated investor” and an “experienced early stage investor.”

Defendants work at The Scripps Research Institute, a nonprofit, publicly funded biomedical research institution. Yu is a chemistry chair and professor at Scripps whose research focuses on the unexpected discovery of new reactions through C-H activation.

In December 2021, Clarke contacted Yu to arrange a time to meet to catch up and perhaps discuss some new company ideas. Yu responded that he was looking forward to catching up and was so excited about my next company focusing more on our C-H activation chemistry.

Consequently, the model he wanted to follow was very different from one biological discovery or a one-product based chemical company.

Instead, Yu wanted to get renewable funding to continuously lead the field and develop a new generation of technologies. The next day, in a separate e-mail thread, Clarke told Yu he couldn’t agree more about the potential for the technology and their new company - the Apple or IBM of the Pharmaceutical industry.

That same month, Clarke contacted an intellectual property attorney about working on patenting strategy and execution and mentioned he was reaching out to Scripps to get thelicensing/research collaboration agreement in process ASAP.

By February, the company was being referred to as CHange Pharma, Inc.

In mid-March, Clarke met separately with Defendants, during which time he claims they orally agreed to a joint venture regarding CHange.

Over the ensuing months, Clarke sent Yu and sometimes Cravatt various iterations of capitalization tables outlining different equity distributions in CHange.

The following spring, Plaintiffs sued Defendants and Scripps, who is not a party to this appeal.

Against Defendants, Plaintiffs asserted claims for breach of oral joint venture agreement, breach of implied joint venture agreement, breach of fiduciary duty, promissory estoppel, and quantum meruit.

Defendants moved for summary judgment on all claims against them.

The trial court granted the motion. It found the joint venture claims failed for three reasons: (1) the agreement, whether oral or implied, was barred by the statute of frauds; (2) the parties agreed to memorialize any agreement in writing; and (3) no mutual assent as to essential terms was reached.

The breach of fiduciary duty claim could not survive given the court’s finding of no enforceable joint venture agreement here.

The court granted summary judgment on the promissory estoppel claim, an equitable claim, based on the availability of an adequate remedy at law.. 

Lastly, it determined Plaintiffs’ quantum meruit claim could not succeed because they presented no evidence that they expected to be paid by Defendants.

Plaintiffs contended the statute of frauds did not bar their claims for breach of oral and implied by conduct joint venture agreement. But the appellate court concluded it does as a matter of law.

A joint venture generally involves an agreement with a “commercial objective” under which the parties have (1) a joint interest in a common business, (2) an understanding to share profits and losses, and (3) a right of joint control.

Whether the parties to a contract have created a joint venture depends upon their actual intention which must be determined in accordance with ordinary rules governing interpretation of contracts.

An agreement that by its terms is not to be performed within a year from the agreement’s making is subject to the statute of frauds, and thus it is invalid unless the agreement is in writing and subscribed by the parties to be charged. (Civ. Code, § 1624, subd. (a)(1).)

Plaintiffs argued the statute of frauds did not apply to oral joint venture agreements like this one.

In support, Plaintiffs relied on Simpson v. Winkelman. There, the court rejected a claim that an oral agreement to dissolve an earlier agreement to share in the profits of the construction and sale of an apartment building was invalid because a joint venture agreement need not be in writing under the statute of frauds but may be formed and dissolved by oral agreement and proved by parol evidence.

Plaintiffs interpreted Simpson as categorically exempting joint venture agreements from the one-year provision of the statute of frauds.

Although Simpson does not specify the ground on which the plaintiff invoked the statute of frauds, nothing in Simpsonindicates it was based on the agreement’s performance—which was to dissolve an earlier agreement— extending beyond one year.

Because an opinion is not authority for a proposition not therein considered, Simpson does not justify ignoring the statutory requirement to put in writing an agreement that, by its terms, cannot be performed in one year. (Civ. Code, § 1624, subd. (a)(1).)

Plaintiffs also claimed that a joint venture implied by conduct is, by definition, not subject to the statute of frauds. Yet this argument failed to persuade for the same reason. They quote a general statement of law that a joint venture may be assumed as a reasonable deduction from the acts and declarations of the parties.

But that decision did not consider whether the terms of the agreement could be performed within one year. Consequently, it cannot be stretched to preclude applying that aspect of the statute of frauds here.

And though Plaintiffs question when the statute of frauds would even begin or end for a joint venture formed by conduct over time, they acknowledge that the length of an agreement’s performance, not the time it takes to reach that agreement, controls for statute of frauds purposes.

The appellate court did not find any case that expressly exempts from the statute of frauds an oral or implied joint venture that by its terms cannot be performed within a year.

It thus held that oral and implied joint ventures are subject to the statute of frauds if the agreement, by its terms, cannot be performed within a year from its making.

It concluded that no genuine disputed issue of material fact existed as to whether the alleged joint venture agreement could, by its terms, be performed within one year because it would take longer than a year to develop the C-H activation technology underlying CHange.

As a result, the statute of frauds rendered both joint venture claims unenforceable, making summary judgment on those claims proper.

To start, Plaintiffs tried to narrow the scope of the alleged joint venture agreement to create CHange Pharma for the purpose of developing’ Yu’s technology.  They then argued CHange could be—and was—created in under a year.

But Clarke testified in deposition that the purpose of the joint venture was to develop and ultimately commercialize Yu’s C-H activation technology.

The parties agreed they contemplated multiple years of work. As Plaintiffs noted, however, the focus is on whether developing and commercializing the C-H activation technology cannot possibly have been completed within one year.

Evidence showed the technology could not be developed within one year.

In the end, there was no genuine dispute that the C-H activation technology underlying CHange could not be developed within one year. As a result, the statute of frauds rendered the joint venture agreement, whether oral or implied, unenforceable.

The trial court granted summary judgment on the breach of fiduciary duty claim because it found no enforceable joint venture agreement.

Plaintiffs countered that this claim should survive summary judgment regardless of whether the terms of the joint venture may be determined with exactness.

With this narrow focus on the indefiniteness of the joint venture’s terms, Plaintiffs did not address why an agreement invalidated under the statute of frauds can give rise to a fiduciary duty claim. Consequently, they did not meet their burden to establish error on appeal.

An element of breach of fiduciary duty is “the existence of a fiduciary relationship.”

Plaintiffs attempted to establish this duty from the joint venture. But because the joint venture was unenforceable under the statute of frauds, the derivative fiduciary duty claim failed as a matter of law.

Only if the existence of the joint adventure is established, it follows that a fiduciary relationship between the co-adventurers arose therefrom.

Plaintiffs sought to revive their promissory estoppel claim. Defendants asked to affirm summary judgment on this claim because, among other grounds, Plaintiffs had not presented evidence of any clear and unambiguous promise by Defendants. The appellat court agreed with Defendants.

A promise is an indispensable element of the doctrine of promissory estoppel.

Promissory estoppel requires that a promise had been made upon which the complaining party relied to that party’s prejudice.

The promise must be “clear and unambiguous in its terms” and cannot be established from preliminary discussions and negotiations.

Here, Plaintiffs claimed Defendants promised to (1) create CHange, (2) provide the use of Scripps labs and post-docs, and (3) work with Scripps to prosecute the patent. Plaintiffs also claim Yu promised to work with Clarke to  make CHange the biggest success.

To the extent these promises overlap with the joint venture agreement, they, too, are barred by the statute of frauds.

To the extent these promises were part of a bargain, like Clarke obtaining equity when creating CHange, promissory estoppel is inapplicable.

Thus, a claim for promissory estoppel based on creating CHange failed as a matter of law.

There was no “clear and unambiguous” promise by Yu to Clarke.

The trial court granted summary judgment on the quantum meruit claim because Plaintiffs presented no evidence that they expected to be paid by Defendants. 

Plaintiffs argued the caselaw contains no such requirement, and regardless a triable issue of fact exists because Clarke expected to be compensated in the form of a lucrative interest in a revolutionary new company.

Quantum meruit refers to the well-established principle that the law implies a promise to pay for services performed under circumstances disclosing that they were not gratuitously rendered.

The burden is on the person making the quantum meruit claim to show the value of the plaintiff’s services and that they were rendered at the request of the person to be charged.

The California Supreme Court has held quantum meruit permits recovery for the reasonable value of a plaintiff’s services where the plaintiff justifiably relied on the belief that defendant would pay for the requested performance.

Plaintiffs asserted Defendants spent months requesting that Clarke perform services like prosecuting a patent application, preparing detailed business and technical plans, arranging meetings and travel, and even finding real estate and potential business partners.

But Plaintiffs conceded Clarke expected to be compensated in the form of his interest in CHange, rather than payment from Yu or Cravatt.

That concession doomed Plaintiffs’ quantum meruit claim as a matter of law.

LESSONS:

1.         A comprehensive written contract is always preferrable to an oral agreement because if a written contract cannot be agreed upon at the inception, it is likely there will not be agreement later and litigation will be required to resolve disputes.

2.         An oral or implied joint venture agreement is subject to the statute of frauds if the agreement, by its terms, cannot be performed within a year from its making. (Civ. Code, § 1624, subd. (a)(1).)

3.         A joint venture generally involves an agreement with a “commercial objective” under which the parties have (1) a joint interest in a common business, (2) an understanding to share profits and losses, and (3) a right of joint control.

4.         The length of an agreement’s performance, not the time it takes to reach that agreement, controls for statute of frauds purposes.

5.         Promissory estoppel requires that a promise had been made upon which the complaining party relied to that party’s prejudice. The promise must be “clear and unambiguous in its terms” and cannot be established from preliminary discussions and negotiations.

6.         Quantum meruit refers to the well-established principle that the law implies a promise to pay for services performed under circumstances disclosing that they were not gratuitously rendered. The burden is on the person making the quantum meruit claim to show the value of the plaintiff’s services and that they were rendered at the request of the person to be charged.